Anadarko shares fall after downgrade

Analyst cites second cut in projected 2003 output

By

LisaSanders

DALLAS (CBS.MW) -- Anadarko shares fell more than 6 percent Friday after the company cut its oil and gas sales output estimate for a second time this year and Merrill Lynch swooped in with a downgrade.

Anadarko slid $2.94 to close at $43.60 on volume of 14.2 million shares. The daily trading average is 2.78 million shares.

Late Thursday, Houston-based Anadarko
APC, -1.82%
lowered its 2003 estimate for oil and gas sales volumes to 190 million barrels-of-oil equivalent from the previous forecast of 200 million BOE. In the second quarter, Anadarko now expects volume of 46 million BOE, down from 48 million BOE.

"Production problems in three areas -- the Gulf of Mexico, Algeria and Qatar -- require that we revise our production volume expectations," said Chairman, President and CEO Robert Allison, in a statement.

Peter Tuz, a security analyst and portfolio manager with Chase Investment Counsel, which owns Anadarko, questioned the way the company delivered the news.

"Earlier in the week, the company cancelled some visits to investors in the Midwest," Tuz said. "Yesterday, they first put out a release, saying a Gulf of Mexico well was a mild success, and the stock rose sharply after falling all day."

Anadarko said Thursday it had discovered natural gas at its Atlas prospect in the eastern waters of the Gulf of Mexico.

"Then, later still, they dropped the production shortfall bomb," Tuz said. "Basically, I think they could have handled the situation much better, and you're not seeing many people willing to step up and buy the stock today."

Anne Vincent, a spokeswoman at Anadarko, responded by saying that the company began to cancel investor and analyst meetings late last week after becoming aware of "developing material non-public information that we were still trying to get a firm handle on. We didn't feel that we could or should meet with an investor or an analyst when we had some material changes pending from the prior guidance."

Anadarko last issued an outlook when it released first quarter results April 25. See archived story.

"We have tried as conscientiously as we could this week to get important material information out as soon as we had the information and we were confident of its accuracy," Vincent said. "We feel we accurately complied with regulations on disclosure of material information to all investors in as timely a fashion as possible."

Credibility gap?

On Friday, Merrill cut Anadarko to "neutral" from "buy." Analyst John Herrlin noted that this is the second time this year that Anadarko has cut output projections.

"The issue that we have with these changes is that it wasn't long ago that management said they were secure with these 2003 volume forecasts of 5 percent and were going to increase capital expenditures by $200 million and seek 12 percent growth in 2004," Herrlin wrote in a note to clients.

Also Thursday, Anadarko raised its outlook for second-quarter earnings to $1.24 a share and its operational cash flow forecast to $740 million. That's up from an earnings estimate of $1.15 a share and cash flow expectations of $710 million.

For the full year, Anadarko said it expects to earn $5.77 a share and generate cash flow from operations of $3.24 billion. Previously, the company expected earnings of $5.51 and cash flow of $3.16 billion.

Anadarko said that high commodity prices would more than offset the cut in expected production.

"While we believe the shortfalls in Algeria and Qatar are temporary, the production issues in the Gulf of Mexico will affect us next year as well," Allison said. "We are still targeting strong production growth in 2004, but we recognize that earnings and returns matter as much as volume targets."

Anadarko is looking at acquisitions that would offer better shareholder returns, Allison said, explaining: "We may choose to add projects to our portfolio that would let us achieve our target.

In the near future, Anadarko plans to announce a $200 million property acquisition that "will add production and cash flow this year and has excellent payout and margins," Allison said.

These volumes are not included in the company's latest outlook, he said.

Herrlin, for one, wasn't appeased. While noting that the acquisition could help offset lower volume, he said: "However, given that some of its higher-profile development projects are not working out according to plan, there could be additional execution risk."

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